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Bonus plans have become a popular tool for compensating managers and employees. While other accounting studies on bonus plans typically focus on earnings management, for example by examining the association between cash bonuses and stock returns or the incentive for management to manage earnings, our study discusses specific issues that are relevant in designing and understanding bonus plans based on financial performance measures.
Bonus contracts should be designed so they align the interest of management and owners. In practice, this is far more difficult than it sounds. We discuss issues that require special attention in preparing bonus contracts: Choice of performance measure(s), accounting issues, link between performance and bonus, and bonus threshold.
Our study should be of interest to managers, compensation committees, investors and others interested in bonus plans. A proper bonus plan is essential to ascertain that management compensation is closely linked to management’s ability to create value.

We examine what determines executive compensation in privately held firms. Our study is motivated by the fact that most studies in this area rely on data from publicly traded firms. Further, the few studies that are based on data from privately held firms only examine a limited number of determinants of executive compensation. Previous studies also assume that the quality of compensation contracts is identical across executives. Based on unique data from our survey we create a quality index on each executive’s bonus plan. We conjecture that the pay to performance relation is stronger for better designed bonus plans.

We examine what determines executive compensation in privately held firms. Our study is motivated by the fact that most studies in this area rely on data from publicly traded firms. Further, the few studies that are based on data from privately held firms only examine a limited number of determinants of executive compensation.
Our findings indicate that the pay to performance relation is weak. Board size and ownership concentration are the only corporate governance characteristics that explain variations in executive compensation. Executive characteristics like skills, title and educational attainment all explain variations in executive compensation. Contrary to our expectations we do not find a stronger pay to performance relation in firms with better designed bonus plans.

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Adopting a survey approach, our study examines how firms implement impairment test of goodwill. We focus on how firms define and measure the recoverable amount of CGU. The survey includes 58 completed questionnaires representing 73% of the firms on the Copenhagen Stock Exchange that recognise goodwill in the balance sheet. Our survey generally supports that a common practice on impairment tests of goodwill has not yet been established. Based on our analysis it is difficult to determine whether this simply reflects that firms adopt an approach suited to their organisational and economic structures or if it exposes that firms are uncertain as how to apply a standard. The analysis also reveals that some of the methods used when defining a CGU are not in compliance with IAS 36. In addition, we find inconsistencies in the way that firms estimate the recoverable amount. Our analysis should be of interest to a number of parties including firms, financial advisors, auditors, standard setters and users of financial statements. Impairment tests, IAS 36, compliance, goodwill, value in use, valuation techniques.

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Fair value accounting has become predominant in accounting as a vast number of IAS/IFRS standards are based on fair value accounting, including IAS 36 Impairment of assets. Fair value accounting for goodwill is technically challenging, since market prices are not observable. Thus, valuation technologies must be applied in order to test goodwill for impairment.
While prior research on goodwill has concentrated on either the (dis)advantages for each accounting procedure for goodwill or examined the value relevance of goodwill (amortization) and goodwill write-offs, little effort has been devoted to the technical problems in the implementation of IAS 36. However, recent research on the topic document that firms commit a variety of errors in applying IAS 36 (Petersen and Plenborg, 2007).
We examine firm characteristics that might explain the frequency of errors that firms commit in applying impairment tests. Our findings suggest that at least two factors might explain why errors are present – the lack of an impairment manual and not involving employees with rigorous experience in firm valuation.
Our research, which might be seen as the fist step toward guidelines in applying technically challenging accounting standards, should be of interest to firms, auditors and standard setters.

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This study focuses on methodological errors that arise when firm valuation is carried out in practice. Violation of assumptions underlying the valuation models are examples of methodological errors. We analyze valuation spreadsheets from five Danish financial institutions (i.e., stockbrokers and corporate finance departments) in order to trace if firm valuation models are properly applied. We conclude the following: (i) Methodological errors often cause valuation models to generate estimates that differ significantly from the theoretically correct value; and (ii) Firm value estimates were biased due to a variety of methodological errors. The implications of those errors may be significant. Investors are exposed to poor recommendations. Financial institutions such as investment bankers and stockbrokers may be exposed to bad reputation and lawsuits. Accounting firms that do not carry out firm valuation correctly (for example in testing goodwill for impairment) also run the risk of litigations.

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’Growth’ as a concept is often not very well understood. Growth may be measured in a variety of ways (e.g., growth in turnover, earnings, earnings per share, assets, and shareholders equity).
Investors and other capital providers generally find it attractive to invest in ‘growth firms.’ For instance, earnings per share (EPS) figures are widely published and used by investors. An increase in EPS is seen as a signal of improved profitability. Likewise, growth in earnings measures such as EBIT, EBITA, EBITDA etc. seem to indicate that firms are value creating.
Our paper discusses if and under what conditions growth in accounting variables (accounting numbers and financial ratios) is value creating. We find that growth in one-periodic earnings measures does not necessarily create wealth for shareholders. Only growth in economic income is value creating. Our analysis also provide evidence that users of accounting information should be aware of the quality of growth and distinguish between growth based on transitory vs. permanent components of earnings. Our analysis finally documents that growth in earnings per share or return on equity caused by share repurchases has no economic significance.